Understanding 1031 Exchanges for First-Time Property TradersInk Well Mag April 2, 2018 0 COMMENTS
Tax geeks may be able to narrate sections of the Internal Revenue Code, but most people have only ever heard of 401(k) or that profit-sharing plan you contribute at your company. Still, the term “Section 1031” is making its way slowly into the mainstream.
Investors, title companies, realtors, and even soccer moms are using it. Broadly speaking, 1031 is an exchange of one investment asset or commercial property for another.
While you treat most swaps as sales, and therefore taxable, coming within 1031 allows you to have limited or total exemption from tax during the time of the exchange.
Tax experts at 1031 Exchange Place talk about what you need to know about this strategy.
Little to no tax cash out
Exchanging your current investment for another will incur tax, normally you have to pay this during the swap. In a 1031 exchange, you can change the form of your asset without recognizing a capital gain or cashing out. The tax will be deferred until you finally decide to sell for cash years later.
“Like-kind” is broad
The provision mentions “like-kind” as a requirement for properties swapped, but the enigmatic phrase is quite broad and may cause confusion. The rules are surprisingly liberal – you can exchange a raw land for an apartment building, a strip mall for a ranch, or even a company for another. However, not all assets qualify, and there are traps to watch out for.
It’s not for personal use
Section 1031 is only for real property and investment, so you can’t exchange your home for another residence. There is a loophole that allows the swapping of vacation houses, but it is much trickier now.
Taking advantage of this provision can be extremely helpful for your growing investment. However, there are special rules to consider, and hiring a professional is the best way to handle complications that may arise when doing a 1031.